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Tax Free Retirement Income with the Roth IRA and Roth 401(k)Copyright © 2006-2008 Daniel LamauteUnder this year's new tax rules it's possible to have a Roth 401(k) in addition to a Roth IRA for Tax Free Retirement Income. Unique to the Roth retirement accounts - Roth 401(k) and Roth IRA - participants save part of their salary on an after-tax basis and their money in the Roth accounts can grow and remain tax-free. That's right; the principal and accumulated earnings of a Roth account can be withdrawn tax-free, provided that certain qualifications are met. In contrast, contributions to a traditional IRA, 401(k), etc, are on a pre-tax basis but withdrawals of every dollar in the traditional accounts are taxed as ordinary income. Most employees will have to wait awhile to participate in a Roth 401(k) because employers have been slow to make the necessary amendments so that their 401(k) can accept Roth contributions, according to a Hewitt Associates survey. But the self-employed, independent contractors and other business owners with no employees can get a Roth 401(k) as a feature in their Self-Employed 401(k) right away. A Roth 401(k) is like the luxury version of the Roth IRA. For example, in 2006, the Roth 401(k) salary deferral limit is $15,000 vs. $4,000 for the Roth IRA, and the "catch up" for those 50 and older is $5,000 vs. $1,000 for the Roth IRA. Loans can be taken from a Roth 401(k) account, but not from a Roth IRA. And, unlike the Roth IRA high income earners are not restricted from having a Roth 401(k). 401(k) contributions can be split between the pre-tax account and the Roth after-tax account. However, the aggregate contributions must not exceed the elective deferral limit. Profit sharing or employer contributions must be made on a pre-tax basis. The Roth 401(k) feature would probably appeal most to: The Roth feature of the Self-Employed 401(k) is valuable tool which allows the small business owner to tailor his investment strategy. The Self-Employed 401(k) can be started by any business that employs only owners, or owners and their spouses, including C corp, S corp, partnerships, and even sole proprietors working from home. Given the complexities of tax rules before reaching a conclusion one should contact his tax advisor regarding his specific legal, investment or tax situation. About The Author:
*** Digital Reprint Rights *** *** Author Notification *** We ask that you notify the author of publication of his or her work. Daniel Lamaute can be reached at: webmaster@lamautecapital.com *** Print Publication Reprint Rights *** If you desire to publish this article in a PRINT publication, you must contact the author directly for Print Permission at: webmaster@lamautecapital.com
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